UCE Practice Questions 5
Choose all that apply. Per the Uniform Commercial Code, all commercial letters of credit must be issued: a) In favor of a specific beneficiary b) For a specific amount of money c) In a form clearly stating how payment to the beneficiary is to be made d) With a specific expiration date
All of the above. Commercial letters of credit are commonly used to finance contracts for the shipment of goods from seller to buyer. See Comptroller's Handbook for Trade Finance and Services, pg. 4
Which of the following guidelines are required of a bank's information security program? Choose all that apply. a) Must be written b) Designed to ensure confidentiality and security of information c) Designed to protect against anticipated threats d) Designed to protect against unauthorized access e) Designed to ensure proper disposal of customer information
All of the above: See Gramm- Leach- Bliley Act - 12 CFR 30, App. B, Pt. II, B
Use the following income statement information ($000's): Interest on loans not held for sale: $2,785 Service charges on customer deposits: $500 Municipal bond interest: $1,275 Interest paid on time deposits: $1,835 Origination fees on loans held for sale: $325 Interest paid on Fed Funds purchased: $200 What is the bank's net interest income? a) $2,025 b) $2,225 c) $2,350 d) $2,850
Answer: a - $2,025: Service charges on customer deposits should be reported as noninterest income. In general, origination fees on loans are includable in interest income; however, when loans are held for sale, the origination fees should be deferred until sold with the gain/loss recognized as noninterest income. See Call Report Instructions, pg. RI-2
True/False: If a bank has a composite rating of "1", there is no limitation on the bank's investment in bank premises.
False - Banks rated a composite "1" or "2" can make investments up to 150% of capital without prior OCC approval as long as the bank is, and will continue to be, well-capitalized after purchase. The bank must still notify the OCC after the purchase. See 12 CFR 5.37
True/False: Like national banks, federal savings associations must be a member of the Federal Reserve System.
False: A national bank must be a member of the Federal Reserve System under 12 USC 222. An FSA cannot be a member of the Federal Reserve System under 12 USC 321. See Quick Reference Guide, pg. 24 http://occnet.occ/human-resources/training/training-guidance-by-audience/examiners/commissioned/quick-reference-guide.pdf
True/False: On the UBPR, if the net interest margin for the bank you are reviewing is in the 7th percentile, it means the bank performs significantly better than other banks in its peer group.
False: If a bank is in the 7th percentile, this means that 93 percent of its peer banks have a better NIM. See UBPR User's Guide, pg. II-3
In compliance with legal lending limits, FNB Podunk made a loan secured by livestock in 2013. In 2014, the collateral value declined below the market value exception. Due to this decline in value, the loan is a violation of the legal lending limit. a) True b) False
False: While not a violation, this would be a "nonconforming" loan. In this instance, bank management would need to remedy the collateral shortfall within 30 days. See 12 CFR 32.6(a)(2) and (c)
Which of the following is included in the risk assessment for operational risk? Choose all that apply. I. Employee turnover II. Information technology III. Compensation programs IV. Internal control environment
I, II, and IV - The quantity of operational risk and the quantity of operational risk management are heavily influenced by the quality and effectiveness of a bank's system of internal control. Compensation programs are primarily considered when rating strategic risk. See Community Bank Supervision Handbook, Appendix A
In regards to overdrafts, which of the following are true? Choose all that apply. I. Federal credit union members must either deposit funds or obtain an approved loan within 60 days from the date of the overdraft II. Overdrafts paid are considered extensions of credit to the borrower III. National banks should charge off overdraft balances within 60 days, unless the borrower is under a repayment plan IV. National banks should charge off balances within 60 days, regardless if the borrow is under a repayment plan
II and IV - As a safety and soundness consideration, national banks should charge off overdrafts beyond 60 days old. The existence of a repayment plan would not extend the charge-off determination period beyond 60 days. In contrast, federal credit unions are required by regulation to not exceed 45 days (instead of 60). See OCC Bulletin 2005-9, pg. 3
True/False: A bank may take shares of its holding company stock as collateral on a loan.
True: While 12 USC 83 prohibits a bank from making any loan on the shares of its own capital stock, there is no prohibition against holding company stock. See 12 USC 83.
What is the maximum term limit for a national bank director? a) 3 years b) 5 years c) 10 years d) There is no limit
a - 3 years: The maximum term for a director is three years. At the end of the three-year term, the director would need to be reappointed for another term. See 12 CFR 7.2024
Which of the following is a type of asset liquidity? a) Federal funds sold b) Federal funds purchased c) Brokered deposits d) Repurchase agreements
a - Federal funds sold. Other forms of asset liquidity includes unencumbered securities and interest bearing bank balances. All other liquidity avenues would be considered liability liquidity. See Liquidity Handbook, pg. 13
Which of the following would qualify as a principal shareholder for insider activities? a) Owning 10 percentage of voting stock b) Owning 20 percentage of voting stock c) Owning 25 percentage of voting stock d) Owning 50 percentage of voting stock
a - Owning 10% of voting stock. For purposes of Reg O, any person holding more than 10 percent of a bank's voting stock would be considered a principal shareholder. See 12 CFR 215.2(m)(1)
What is the OCC's definition of asset management? a) The business of providing financial products or services to a third party for a fee or commission b) The business of providing financial products or services to customers for the purpose of generating profits c) The business of providing financial products or services to wealthy clients for the purpose of preserving wealth d) The business of providing financial products or services to a third party for a fee or commission for the purpose of preserving wealth
a - See Asset Management Handbook, pg. 1
Which of the following is a general characteristic of federal savings associations (FSAs) earnings? a) FSAs tend to have less diverse sources of earnings b) FSAs heavily rely on commercial and consumer lending c) Generally have higher return on assets due to balance sheet diversification d) All of the above
a - Tend to have less diverse earnings with a mortgage focus. While FSAs tend to specialize in real estate lending, over time they have acquired a wider range of powers and offer business and consumer loans. See Quick Reference Guide, pg. 89
In reviewing a bank's investment portfolio, which of the following should be used as the basis for computing any limitations? a) Par value b) Book value c) Purchase price d) Market value
a - The amount compared to capital should be the aggregate par value. See 12 CFR 1.3
Which of the following is true of the call report for national banks? a) Must be signed by at least three directors b) Must be prepared by the bank's cashier c) Must be submitted within 20 days of the end of the quarter d) Must be reviewed by the bank president
a - The call report requires at least three director's signatures attesting to the report's accuracy. In addition, the processor should receive the call report within 30 days following the call report date. See 12 USC 161(a) and OCC PPM 5000-27
Each bank must provide the standard CRA public notice in the lobby of its main office and each of its branches. a) True b) False
a - The public notice language is contained in Appendix B of the regulation. See 12 CFR 25.44
Modified duration measures the price sensitivity of a security to a given percentage change in interest rates. a) True b) False
a - True. Duration can mean both the price sensitivity and the weighted average term to maturity. Modified duration refers to the price sensitivity of securities. The greater the number, the more sensitive the bond or security value is to interest rate changes. See Interest Rate Risk Handbook, pg. 57
On the UBPR, the Average Personnel Expense per Employee means the average salary (including benefits) per employee expressed in thousands of dollars. a) True b) False
a - True. This measure includes employee benefits. See UBPR User's Guide, pg. III-12
In reviewing loans for compliance with insider lending regulations, which of the following would NOT qualify as an extension of credit? a) An advance against accrued salary or accrued compensation b) An increase in existing indebtedness at borrower's request c) Granting a line of credit d) Issuance of a standby letter of credit
a - While an advance of unearned salary or other unearned compensations for a period in excess of 30 days is an extension of credit, an advance against accrued salary or other accrued compensation is not an extension of credit. See 12 CFR 215.3(b)(1)
First National Bank has an internal loan program whereby all employees can get an auto loan for 36 months at 5%. Can a director of this bank take advantage of this loan program? a) Yes b) No
a - Yes: While offering preferential rates to a director is prohibited, there is an exception when it is widely available to all employees. See 12 CFR 215.4(a)(2)(i).
A national bank just made a book entry to provide for possible losses on loans. Which of the following effect would the entry have on expenses? a) Increase b) Decrease c) Stabilize d) No effect
a - increase. The journal entry will cause an increase to expenses and the allowance for loan and lease losses. The appropriate entry would be the following: DR: Provision Expense CR: ALLL
First National Bank is a small bank, with growth primarily centered in loans. Recently rates have increased and the bank's net interest margin has declined. Which of the following is the most likely cause of this trend? a) The bank is liability sensitive b) The bank has a matched gap position c) The bank is flush with liquidity d) The bank is asset sensitive
a - the bank is liability sensitive: A liability sensitive position indicates liabilities are repricing faster than assets. The earnings of a liability-sensitive bank generally decrease when interest rates rise because their liability costs are increasing faster than their ability to increase asset rates. See Interest Rate Risk Handbook, pg. 8
First National Bank plans to purchase a loan participation from a large state bank. Per OCC guidance, which of the following is true? Choose all that apply. a) FNB should perform an independent credit analysis on the credit b) FNB only needs to review a credit analysis performed by the selling bank c) The purchase should include an agreement by the seller to provide available credit information d) FNB should perform a pre-purchase analysis consistent with that of an investment security
a and c: The purchase of participations may constitute an unsafe and unsound banking practice in the absence of satisfactory documentation, credit analysis, and other controls over risk. The acceptance by a purchaser of an analysis issued by the seller does not satisfy the need to conduct an independent credit analysis. See Banking Circular - 181 "Purchase of Loans in Whole or in Part-Participations"
For banks with trust departments, which of the following is a required component rating for all banks under the Uniform Interagency Trust Rating System? Choose all that apply. a) Management b) Operations, Controls, and Audits c) Earnings d) Compliance e) Asset Management
a, b, and d. An earnings component rating is not required for banks with fiduciary assets less than $100 million. In addition, the OCC will waive the asset management rating if the bank's activities do not include managing or advising fiduciary assets. See Bank Supervision Process Handbook, Appendix C
A loan is secured by the following collateral: Collateral Type Value Senior Lien Raw Land $135,000 $53,000 Improved Commercial $360,000 - What is the aggregate amount that can be loaned against the collateral pool and still conform to supervisory loan-to-value limits? a) $340,750 b) $359,300 c) $393,750 d) $407,250
b - $359,300 [((135,000-53,000)*.65) + (360,000*.85) = $359,300]. The SLTV for raw land and improved commercial property is 65% and 85%, respectively. When a loan is crosscollateralized with two or more properties or a collateral pool, the maximum SLTV should be calculated after subtracting any senior liens. See 12 CFR 34 Subpart D, Appendix A
For the purpose of 12 USC 371c, an affiliate with which of the following percentage ownership is deemed to have control? a) 10% b) 25% c) 50% d) 80%
b - 25%: Control is obtained at 25% ownership, while an affiliate would be considered an operating subsidiary with over 50% ownership and a sister bank with 80% or more ownership. See 12 USC 371c. 371c applies specifically to legal restrictions as it relates to transactions with an affiliate.
Which of the following is the risk to earnings or capital arising from violations of laws, rules, or regulations, or from nonconformance with prescribed practices, internal polices, or ethical standards? a) Strategic Risk b) Compliance Risk c) Operational Risk d) Reputation Risk
b - Compliance Risk. Compliance risk is not limited to risk from failure to comply with consumer protection laws, but also encompasses the risk of noncompliance with all laws and regulations. See Bank Supervision Process Handbook, pg. 98
First National Bank has a risk-based capital (RBC) ratio of 12 percent, a tier 1RBC ratio of 5 percent, and a tier 1 leverage ratio of 8 percent. The bank is not under any form of enforcement action. Per Prompt Corrective Action, the bank would be considered which of the following? a) Well-capitalized b) Adequately-capitalized c) Undercapitalized d) Significantly Undercapitalized
b - Currently, the bank would fall under the "adequately-capitalized" definition. To be well-capitalized, a bank must have a RBC ratio of 10% or greater, a tier 1 RBC ratio of 6% or greater, and a leverage ratio of 5% or greater. It should be noted that as of January 1, 2015, tier 1 RBC minimums would change. See 12 CFR 6, pg. 5
FNB Anytown loaned $300 thousand to a borrower for the purchase of commercial rental property and rental cashflows are sufficient to repay the terms of the loan. The bank does not have to obtain a state-certified appraisal because it was a commercial loan less than $1 million. a) True b) False
b - False. An exception exists for real-estate secured business loans less than $1 million. However, if the primary source of repayment is the sale of real estate or rental income derived from, the business loan exception of $1 million defaults to the $250 thousand threshold established for all other transactions. See 12 CFR 34.43 and OCC Bulletin 2010-42, Appendix A(5)
While a prearranged overdraft is not considered an extension of credit for legal lending limits, an unexpected overdraft is. a) True b) False
b - False. An overdraft, whether or not prearranged, is considered an extension of credit for legal lending limits. Intra-day overdrafts for which payment is received before the close of business is not considered an extension of credit. See 12 CFR 32.2(q)(1)(iv)
By nature, carryover debt on an agriculture loan indicates a well-defined credit weakness and should be classified as substandard. a) True b) False
b - False. Examiners should not automatically classify carryover debt and should carefully examine all relevant data to ensure an accurate rating. When collateral does not cover carryover debt and repayment capacity is not evidenced, the carryover balance should be classified and the examiner needs to determine whether a loss rating is appropriate. See Agriculture Lending Handbook, pg. 25
A national bank may never declare a dividend if the total amount of all dividends exceeds current year net income and the retained earnings of the preceding two years. a) True b) False
b - False. The OCC may approve dividends that exceed the threshold; however, approval should be obtained BEFORE declaring the dividend. See 12 USC 60
Which of the following addresses loan portfolio stress testing? a) 12 CFR 1 b) OCC Bulletin 2012-33 c) 12 CFR 215 d) OCC Bulletin 2010-12
b - OCC Bulletin 2012-33
Assuming First National Bank owns 100 percent of Mortgages R Us, which of the following best describes the mortgage company? a) Statutory subsidiary b) Operating subsidiary c) Financial subsidiary d) b and c
b - Operating subsidiary. Operating subsidiaries engage in activities that are part of, or incidental to, the business of banking. Financial subsidiaries engage in activities that are financial in nature. A financial subsidiary does not engage solely in activities that national banks may engage in directly. See Related Organizations Handbook, pg. 7
According to OCC guidance, which of the following loan types would not be included in commercial real estate for concentration purposes? a) One- to four-family residential construction loans b) Owner-occupied nonfarm nonresidential loans c) Multifamily residential property loans d) Non owner-occupied nonfarm nonresidential loans
b - Owner-occupied nonfarm nonresidential loans: As loan portfolio concentrations exceed specified limits, they may be identified for further supervisory analysis. Specifically excluded from the scope of our guidance is loans secured by nonfarm nonresidential properties where the primary source of repayment is cash flow from ongoing operations by the party who owns the property. See OCC Bulletin 2006-46.
A review of the bank's indirect automobile portfolio reveals four loans that are 105 days delinquent. How should these loans be graded? a) Special Mention b) Substandard c) Doubtful d) Loss
b - Per retail guidance, open- and closed-end retail loans past due 90 days should generally be classified substandard; however, exceptions do exist. One- to four-family residential real estate and home equity loans (if the bank also holds the senior mortgage) need not be classified on delinquency status alone if the LTV is less than or equal to 60 percent. See OCC Bulletin 2000-20
When reviewing the UBPR, which statement is true about banks that elect Subchapter S status for income taxes? a) A flat 28% rate is applied to cash dividends b) The UBPR adjusts after tax earnings and dividends used in the ratios c) Dollar data displayed in the UBPR is adjusted for Subchapter S status d) The UBPR does not adjust after tax earnings and dividends used in the ratios
b - See UBPR User's Guide, pg. III-4
When reviewing a commercial real estate loan for an office building, an examiner notices that the lease agreements are triple net. In general, what is meant by triple net? a) The lessor will pay all expenses such as maintenance, insurance and taxes b) The tenant will pay all expenses such as maintenance, insurance and taxes c) The tenant pays rent directly to the bank d) The tenant must deposit three months of rent in advance
b - Tenant pays all expenses. See Commercial Real Estate Handbook Appendix C, pg. 124
FNB Anytown needs to provide funds to satisfy liquidity needs. Which of the following may the bank do? a) Increase holdings of liquid assets b) Increase liabilities of a term nature c) Purchase treasury stock d) Increase holding of non-liquid assets e) All of the above
b - The bank may increase liabilities of a term nature. For example, management may purchase federal funds to obtain appropriate liquidity in the short term. All other choices would require a use of funds. See Liquidity Handbook
Which of the following is best described as the purchase of securities with the intent to resell and profit from short-term price movement? a) Investment portfolio holdings b) Trading c) Underwriting d) Securities distribution
b - Trading. Securities held in trading accounts should be periodically (at least monthly) marked to market, with unrealized gain or losses recognized in current income. See Investment Securities Handbook
Which of the following investment types may national banks underwrite? I. Type I II. Type II III. Type III IV. Type IV a) I only b) I and II c) I, II, and III d) I, II, III, and IV
b - Types I and II. National banks may not underwrite Type III, IV, or V securities. See 12 CFR 1.3
Complex National Bank has purchased a credit-impaired loan from a national bank down the street. The former bank had the loan placed on nonaccrual status due to credit deterioration. Which of the following is the best accounting treatment for Complex National Bank? a) Accrual; the loan was purchased not originated b) Accrual; if the bank can reasonably estimate cash flows c) Nonaccrual; the loan was previously on nonaccrual status d) Neither; the loan should be considered an investment security
b - accrual if the bank can reasonable estimate cash flows. Purchased credit-impaired (PCI) loans may be placed on accrual if the bank can reasonably estimate cash flows from the loan or pool of loans. See Bank Accounting Advisory Series (BAAS) Topic 2B, Question 28 and 29. The call report instructions glossary also has a brief description of PCI loans.
As of March 30, City National Bank has an RSA/RSL ratio of 1.08 indicating a relatively even balance sheet. Based on this information, we can determine that the bank has low interest rate risk because repricing risk is minimal. a) True b) False
b - false. Interest rate risk is comprised of repricing, basis, yield curve, and options risks. We must review all applicable risks in addition to repricing risk. A ratio greater than one suggests that the bank is asset-sensitive and has more assets than liabilities subject to repricing. See Interest Rate Risk Handbook, pg. 19
A creditor may never require the signature of an applicant's spouse on an instrument, other than a joint applicant, if the applicant qualifies under the creditor's standards on an individual basis. a) True b) False
b - false: Generally, a creditor may not require a spouse's signature unless he or she is a joint applicant. However, as with almost all regulations, there are exceptions. Generally, a creditor may only obtain the spouse's signature if the collateral taken is owned jointly and the signature is needed legally, under the law of the state in which the property is located, to obtain access to the collateral. See Equal Credit Opportunity Act, 12 CFR 1002.7(d)
Which of the following best describes a firewall? a) A "hot site" serviced by a vendor b) Detects and prevents receipt and transmission of unauthorized data protection c) A method of virus protection d) Encodes messages in a form unreadable to an unauthorized interceptor
b -A firewall is a hardware or software link in a network that relays only data packets clearly intended and authorized to reach the other side. See FFIEC IT Glossary, http://ithandbook.ffiec.gov/glossary.aspx
Which of the following could be considered a BSA red flag? Choose all that apply. a) Audit is risk focused b) The volume of SARs is very high c) The volume of SARs is very low d) Large volume of transactions to geographic areas that are consistent with customer's business e) Customers make frequent transfers between accounts in the bank
b, c, and e: A high or low volume of SARs may indicate employees are not trained properly or that employees are intentionally not reporting SARs when required by law. In addition, frequent transfers between accounts could indicate customers are trying to circumvent CTR requirements or launder money. See Detecting Red Flags in Board Reports: A Guide for Directors, pg. 58
The maximum period a Federal Savings Association can hold other real estate owned is ten years. a) True b) False
b: While national bank and FSA regulations do not share the same OREO requirements, the intent of the regulations is similar. OREO can be held through a subsidiary as an equity investment in real estate; however, the subsidiary is not includable for capital purposes. See Quick Reference Guide, pg. 62
Upon notification that there is insufficient flood insurance coverage, how long does a borrower have to obtain sufficient coverage? a) 15 days b) 30 days c) 45 days d) 60 days
c - 45 days. Once the borrower has received notice that flood insurance is insufficient or about to expire, the borrower has 45 days to obtain sufficient coverage. If not obtained within 45 days, the bank may purchase forced-place insurance. See 12 CFR 22.7 and Flood Handbook, pgs. 8-9
Which of the following is reflective of an asset quality rating of "2"? a) Asset quality or credit administration practices are less than satisfactory b) The levels of risk and problem assets are significant and inadequately controlled c) The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention d) Identified weaknesses are minor in nature and risk exposure is modest in relation to capital protection and management's abilities
c - A rating of 2 indicates satisfactory asset quality and credit administration practices. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensurate with capital protection and management's abilities. See Bank Supervision Process Handbook, pg. 48
An external CPA year-end audit report for a bank states the financial statements do not fairly present the bank's financial position and are not in conformity with GAAP. What type of opinion has been rendered?
c - Adverse: A major distinction between an adverse and disclaimer opinion is that an adverse opinion indicates there is a substantial issue with the financial statements, while a disclaimer indicates that management has restricted the scope of the audit firm and they are unable to render an opinion. See Audit Handbook, pg. 40
Which of the following assets would not be considered an investment in bank premises? a) Parking facilities b) Capital leases c) Furniture and fixtures d) Real estate acquired for future expansion
c - Bank premises are defined as 1)premises that are owned and occupied by the bank, 2)capitalized leases and leasehold improvements, 3)remodeling costs to existing premises, 4)real estate acquired and intended for future expansion, and 5)parking facilities that are used by customers or employees. See 12 CFR 5.37
Which of the following enforcement actions becomes effective thirty days after service? a) Formal Agreement b) Consent Order c) Cease and Desist Order (C&D) d) Temporary C&D Order
c - Cease and Desist Order: True C&D orders (issued without consent of the board) become effective 30 days after service unless it is contested. The other enforcement actions listed are effective immediately, even though a temporary C&D order can be contested within 10 days of issuance. See 12 USC 16, §1818(b)(2).
A board policy that establishes extremely low tolerances for interest rate risk is likely to affect the bank in which way? a) Increase the bank's basis risk b) Reduce the bank's dependence on core deposits c) Reduce the bank's ability to generate high returns d) Increase the bank's return volatility
c - Due to the risk/return principle, extremely low risk tolerances is likely to reduce the bank's ability to generate high returns
When a loan is placed on nonaccrual, which of the following has to be true in order for a bank to recognize interest on a cash basis? a) Recorded loan balance must be uncollectible b) Recorded loan balance must be recognizable c) Recorded loan balance must be fully collectible d) Recorded loan balance must be measurable
c - Fully collectible: While an asset is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible. See Call Report Instructions Glossary, pg. A-61
Which of the following bank investments would be accounted for at amortized cost? a) Available for sale b) Trading c) Held to maturity d) Speculative in nature
c - Held to maturity: Investment securities may be carried at amortized cost only when the bank can demonstrate the intent and ability to hold the securities to maturity. See Investment Handbook, pg. 23
Which represents a use of bank funds? a) Acquiring deposits b) Issuing additional capital c) Increasing investment securities d) Increasing the allowance for loan and lease losses
c - Increasing investment securities is a use of bank funds. Both acquiring deposits and issuing capital is a source of bank funds, while increasing the ALLL is a non-cash expense.
An auto loan is 130 days past due and the bank has no plans to repossess the asset. Which of the following would be the best risk rating for the credit? a) Substandard b) Doubtful c) Loss of the full balance d) Write-down to collateral value
c - Loss of the full balance. Closedend retail loans that are past due 120 days or more should be classified as loss and charged off. Loans with nonreal estate collateral may be written down to collateral value (less cost to sell) if repossession is assured and in process. In this example, management has no plans to repossess so the entire loan balance should be written off. See OCC Bulletin 2000-20
An operating subsidiary of a national bank is a subsidiary in which the parent bank directly owns what percentage of its outstanding voting stock? a) 10% or more b) More than 25% c) More than 50% d) 80% or more
c - More than 50%. See 12 CFR 5.34(2)
Generally, which of the following is not indicative of a bank with a "2" composite rating? a) The bank is fundamentally sound b) The bank is in substantial compliance with laws and regulations c) Risk management practices may be less than satisfactory d) There are no material supervisory concerns and the bank may require limited supervision
c - Risk management practices that are less than satisfactory are generally indicative of a "3" rated bank. See Bank Supervision Process Handbook, Appendix A
When assessing the quantity of interest rate risk, what is characteristic of a moderate risk rating? a) there is little or no exposure to multiple indexes that price assets & liabilities b) repricing mismatches are longer-term, and may be significant, complex, or difficult to hedge c) mismatches on longer-term positions exist but are manageable and could be effectively hedged d) no significant mismatches on longer-term positions exist, and shorter-term exposures are simple and easily adjusted to control risk
c - See Community Bank Supervision Handbook, Appendix A
If a director is reelected to the board of a national bank and resigns six months into the term, which scenario best complies with regulation? a) No action required if at least 5 directors remain b) The director can personally select his successor c) The board fills his position by appointment until the next election d) A special election is required e) OCC is required to appoint a temporary director.
c - The board fills the position by appointment. See 12 CFR 7.2007(b) or 12 USC 74.
Use the following income statement information ($000's): Net interest income: $3,015 Personnel expense: $1,236 Noninterest income: $1,315 Total overhead expense: $2,320 Net income: $871 What is the bank's efficiency ratio? a) 28.55 b) 37.54 c) 53.58 d) 76.95
c - The efficiency ratio is calculated by comparing total overhead expense ($2,320) to net interest income and noninterest income ($3,015+$1,315). The ratio measures how much overhead it takes to earn a dollar of revenue. See UBPR User's Guide, pg. III-12
Which of the following common benchmarks is used in an economic value analysis to provide a measure of the underlying value of the bank's current position? a) Par value b) Book value c) Present value d) Future value
c - present value: The economic value of instruments sensitive to interest rate changes equals the present value of their future cash flows. By evaluating changes in the present value of the contracts that result from a given change in interest rates, one can estimate the change to a bank's economic value. See Interest Rate Risk Handbook, pg. 5
Which best describes a bank that exhibits low liquidity risk? a) The bank relies heavily on short-term funding sources b) The bank's loan to deposit ratio is above its national peer group c) The bank's cost of funds is low compared to its local peer group d) Loan growth is projected to exceed deposit growth over the next year
c: The remaining choices indicate greater liquidity needs than Choice C. See Liquidity Handbook and Community Bank Supervision Handbook, pg. 142
On May 31, a bank buys a $100,000 par value municipal bond with a coupon rate of nine percent, which is yielding eight percent. Interest on the bond is payable twice a year at the end of the second and fourth calendar quarters. The book value of the bond on the date of purchase is $112,000. The accrued interest is included in the purchase price of the bond. What is the amount of the accrued interest purchased? a) $1,875 b) $3,000 c) $3,333 d) $3,750
d - $3,750: As interest payments are calculated using the coupon rate of 9% and par value of $100,000, the bank is entitled to receive $4,500 semiannually or $750 a month of accruable interest. Considering the bank purchased the bond on May 31 (five months of the first semiannual payment), the bank would have paid the seller $3,750 in accrued interest.
Use the following September 30, 2014 UBPR information: Net Income $1,365 Total Assets $194,300 Dividends $464 Average Assets $186,753 What is the bank's ROAA? a) 0.64 b) 0.73 c) 0.94 d) 0.97
d - 0.97: (($1,365/3)*4)/$186,753 = 0.97. In general, income and expense items on the UBPR are shown for year-to-date periods. Income and expense ratios on pages 1, 3, 7, and 11 of the UBPR are annualized to allow ratio comparison between quarters. See User's Guide for UBPR
FNB has a gap ratio of 0.90 during the 60-day time period. What does this mean? a) 90% of the bank's assets reprice within 60 days b) 90% of the bank's liabilities reprice within 60 days c) for every 1% change in interest rates in this time period, net interest income will change 0.90% d) more of the bank's liabilities than assets reprice in this time period
d - A rate-sensitive assets to rate-sensitive liabilities ratio greater than 1.0 indicates that more assets on the balance sheet are subject to repricing than liabilities. The opposite is true for ratios less than 1.0. See IRR Handbook, pg. 19
During a recent asset quality review, an examiner downgraded a loan from special mention to doubtful. What should have been done with the accrued interest on the credit? a) A reversal of accrued interest proportionate to the amount designated as doubtful b) Nothing; the loan should continue to accrue interest c) A reduction to interest income only d) A reversal of all previously accrued but uncollected interest
d - A reversal of all previously accrued but uncollected interest: A risk rating of doubtful results in automatic nonaccrual status. In accordance with GAAP, all previously accrued but uncollected interest should be reversed. The appropriate journal entry for current-year interest reversal would include a debit to interest income and a credit to accrued interest. See call report instructions, pg. A-60
When bank management materially restricts the scope of an external auditor, what type of opinion is issued? a) Unqualified b) Qualified c) Adverse d) Disclaimer
d - Disclaimer. When management restricts the scope of the audit, a disclaimer opinion is issued. An adverse opinion would be issued if the financial statements did not fairly represent the condition of the bank or did not conform to GAAP. See Internal and External Audits Handbook, pgs. 40 - 41
Which of the following is not included in the on-hand liquidity ratio? a) Interest bearing bank balances b) Reverse repurchase agreements c) Fair value of AFS securities d) Fair value of HTM securities
d - Fair value of HTM securities. While HTM securities are included, it is the book value not the fair value. All of the other choices are included in the on-hand liquidity ratio. See Canary User's Guide (PPM 5000-34)
Which of the following is true regarding federal funds? a) Federal funds are FDIC insured b) Federal funds are a long-term liquidity tool c) Federal funds are typically secured by U.S. Treasury securities d) Federal funds may be difficult to obtain when a bank experiences financial difficulties
d - Fed funds may be difficult to obtain under financial difficulties. Fed funds are a short-term alternative funding source. Many banks use this type of funding during contingency situations; however, the availability of funding under distressed condition may be severely limited. See Liquidity Handbook, pgs. 16-17
All national banks must maintain a security program. Which of the following is required as a part of the security program? I. Procedures for opening and closing for business II. Procedures that will assist in identifying persons committing crimes against the bank III. Initial and periodic training of employee responsibilities IV. Selecting, testing, operating, and maintain appropriate security devices a) IV only b) I and II c) I, II, and IV d) I, II, III, and IV
d - I, II, III, and IV. A bank's security program should include all of the above. See 12 CFR 21.3
While examining the audit function of a bank, examiners noted final audit reports are sent only to the President. The President corrected and documented weaknesses in memos. Which of the following is true of board supervision? a) Adequate because audit reports are reviewed by a senior officer and corrections are timely b) Adequate because sufficient audit trails exist and are readily available to the Board c) Inadequate because memos should not be filed with President Doe but should be circulated to department heads and to the auditor d) Inadequate because reports should be forwarded from the internal auditor directly to the board or its audit committee
d - Inadequate because reports should be forward to the board or audit committee. Forwarding internal audit reports to the board ensures independence. See Internal and External Audits Handbook
FNB Anywhere sold a portion of its held-to-maturity (HTM) investment portfolio to gain additional liquidity. Which statement is true? a) The bank has "tainted" the HTM investment portfolio and may never again have a HTM portfolio b) The bank has "tainted" the HTM investment portfolio and all remaining securities in the existing portfolio must be liquidated c) The bank can continue to operate a HTM portfolio because selling from the HTM portfolio for liquidity purposes is one of the "safe harbor" exemptions d) The bank has "tainted" the HTM investment portfolio and all remaining securities in the existing portfolio must be transferred to the available-for-sale (AFS) category
d - The bank has "tainted" the HTM portfolio and all remaining HTM securities should be reclassified as AFS. There are certain "safe harbor" exemptions under which a bank may sell a portion of their HTM portfolio; however, to gain additional liquidity is not one of them. See OCC Bank Accounting Advisory Series, Topic 1A (question 8) or Accounting Standards Codification (ASC) 320
Which of the following loans would require an appraisal? a) $200,000 commercial loan secured by rental property b) $1,100,000 loan fully secured by a U. S. government agency c) $270,000 loan secured by machinery, equipment, and a vacation home for which the real estate lien was taken as an abundance of caution d) $1,200,000 loan to purchase commercial real estate that is not dependent on the sale of, or rental income derived from, the subject real estate as the primary source of repayment
d - This loan would require an appraisal as the transaction value is over $1 million. While the other loans do not require an appraisal, choices (a) and (c) would require evaluations under 12 CFR 34.43(b). Loan (b) would not require an appraisal as it is secured by a government agency. See 12 CFR 34.43
What are transactions between affiliates typically called? a) subsidiary transactions b) covered transactions c) incidental transactions d) none of the above
d: Control is obtained at 25% ownership, while an affiliate would be considered an operating subsidiary with over 50% ownership and a sister bank with 80% or more ownership. See 12 USC 371c. 371c applies specifically to legal restrictions as it relates to transactions with an affiliate.